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TJX Companies or Ross Stores: Which Is Better Placed?

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The retail landscape has been undergoing a fundamental change in recent years, with technology leaving a deep and lasting impact on the space. Online shopping dominates the space now with its effective grip steadily taking over the minds of consumers.

Traditional retailers are witnessing declining footfalls at their stores as more and more buyers are opting for the convenience of buying through the internet. Although these retailers are developing their omni-channel retailing and eCommerce initiatives, Amazon.com Inc. (AMZN - Free Report) steals the show.

However, the discount retail seems to be in a somewhat better position compared to traditional retailers as there is a general shift of consumers’ preference towards discount stores. The impressive scenario in the retail discount industry is evident from the fact that out of the 260-plus industries, the Retail-Discount Industry holds a Zacks Industry Rank #35.

The industry falls in the top 13% of all Industry Ranks, which signals that the outlook for the industry is ‘Positive’. We rank all the 260-plus industries in 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

Given this backdrop, let’s try to ascertain which of these two key retail/discount players – The TJX Companies Inc. (TJX - Free Report) and Ross Stores Inc. (ROST - Free Report) , presently make for a better investment option. Both of these stocks carry a Zacks Rank #2 (Buy) and belong to the Retail-Discount Industry.

TJX Companies’ market capitalization is $49.99 billion, while that of Ross Stores is $26.37 billion. Though it is smaller in business size, Ross Stores gives a good competition to TJX Companies driven by its strong fundamentals.

What Are the Inherent Strengths?

Long-term investors judge a stock on the basis of its fundamentals, while investing. So let’s ascertain these two stocks on the basis of their fundamentals.

TJX Companies, which offers a wide array of products ranging from apparels, to home decors and gifts, has a huge sourcing machinery comprising of 18,000 vendors in over 100 countries. The company is not only focusing on expanding its brick-and-mortar stores but has also undertaken numerous initiatives to augment online sales. The company intends to add more categories to the online shopping site, tjxmaxx.com.

Coming to Ross Stores, the company keeps itself on the growth trajectory through consistent focus on merchandising organization through investments in workforce, processes and technology. Moreover, management continually fine tunes and upgrades its processes to enhance productivity. The company is also aggressively opening stores, and its long term target is to attain store count of 2,500, comprising 2,000 Ross and 500 dd’s DISCOUNTS stores.

Fundamentally, TJX Companies looks relatively sound in comparison to Ross Stores.

What Do the Top & Bottom Line Say?

Well both TJX Companies and Ross Stores have portrayed a modest earnings and revenue performance in the past three years. We note that both the companies have reported positive earnings and sales surprises in nine of the past 12 quarters.

Starting with TJX Companies, the company has registered an average positive earnings surprise of 5.9% in the trailing four quarters. We noticed that although the company has witnessed an increase in its top and bottom lines but the rate of growth has decelerated in the past three quarters. It reported an earnings growth rate of 10.1%, 5%, and 6% in the first, second and third quarters of fiscal 2016, respectively, while witnessed sales growth of 9.8%, 7% and 6.9% during the same time frame.

Ross Stores also portrays a decent earnings picture. The company has outperformed the Zacks Consensus Estimate in the trailing four quarters by an average of 5%. Moreover, we noted that the rate of growth in bottom line has accelerated – 5.8%, 13%, and 17% in the first, second and third quarters of fiscal 2016, respectively. In term of top-line growth rates, Ross Stores reported sales growth of 5.1%, 7.2% and 10.9% in the past three quarters.

Thus, the scales tip in favor of Ross Stores as it has an accelerating rate of growth with respect to both the top and bottom line.

How is the Margin Scenario?

To maintain better margins is a tough task for these discount retailers. Due to their off price retail nature these companies can’t raise the prices when selling cost accelerates.

TJX Companies has been struggling with lower margins in the past few quarters, mainly due to wage increments announced in 2016. Its operating margins have decreased by 40 basis points, 50 basis points and 20 basis points in the first, second and third quarters of fiscal 2017, respectively. On the contrary, Ross Stores has been able to expand its margins. Although it experienced a marginal contraction in operating margin in the first quarter of fiscal 2017, the company expanded its margin 20 basis points and 10 basis points in the subsequent quarters.

Clearly, TJX Companies is struggling with its margins while Ross Stores enjoys an edge.

Dividend Yield

Dividend stocks are always the investors’ preferred choice as they provide steady income and cushion against market risks. We note that an impressive dividend yield is also important for identifying strong dividend-paying stocks.

In terms of dividend yield TJX Companies emerges as a favorable pick. While the dividend yield of Ross Stores is 0.8%, that of TJX is higher at 1.4% both compared with the closing price on Jan 19, 2016.

We also noticed that TJX Companies hiked its dividend by 23.8% in May 2016, while Ross Stores increased its dividend by 14.4% in Mar 2016.

Stock vs. Industry

Whatever may the fundamentals, but short-term investors are always looking for higher prices that provide them profit on top of the money they invest.

In this respect, Ross Stores wins as its shares have gained 26.4%, outperforming the industry which gained by 10.6% in the past one year as well as its close competitor TJX Companies which moved closely with the industry and showcased a gain of 11.3%.

VGM Score

We have often seen that stocks with the best value (V), growth (G) and momentum (M) characteristics outperform the market. With the help of our new style score system – VGM Score, it is easy to filter the winning stocks. This is perfectly suited for those investors who want their stocks to have the best scores across the board. In order to screen out stocks with huge potential, we can consider those that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B.’

TJX Companies has a VGM score of ‘B,’ while Ross Store has VGM score of ‘D.’ Therefore, TJX Companies’ Zacks Rank #2 when combined with its attractive VGM Score of ‘B’ makes it a favorable investing option.

Since VGM Style Score highlights a stock’s inherent strengths and weaknesses, we can safely conclude that TJX Companies is better placed than Ross Stores.

Stocks with Favorable Combination

A couple of stocks with similar favorable combinations include Burlington Stores Inc. (BURL - Free Report) with a Zacks Rank #1 and a VGM Score of ‘A’ and Dollar Tree Inc. (DLTR - Free Report) with a Zacks Rank #2 and a VGM Score of ‘B.’ You can see the complete list of today’s Zacks #1 Rank stocks here.

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